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Financial Regulatory Reform: What You Need to Know

The
Dodd-Frank Wall Street Reform and Consumer Protection Act, which
became law in July, will create new regulations for companies that
extend credit to consumers, exempt small public companies from
Sarbanes-Oxley section 404(b), make auditors of broker-dealers
subject to PCAOB regulation and change registration requirements for
investment advisers. The profession successfully advocated for CPAs
to be carved out of the new Consumer Financial Protection Bureau for
usual and customary activities.

Some
highlights of the legislation that may be of particular interest to
CPAs are summarized below (see Exhibit
1 for additional details).

FINANCIAL STABILITY OVERSIGHT COUNCIL

The
legislation creates a new systemic risk regulator called the
Financial Stability Oversight Council. The council, chaired by the
Treasury secretary and whose members will be heads of regulatory
agencies, including the chairmen of the Federal Reserve, FDIC and
SEC among others, will identify any company, product or activity
that could threaten the financial system.

The
Federal Reserve will supervise the companies identified by the
council, and the FDIC would carry out instructions by the council to
close large entities under a new orderly liquidation authority. The
council, through the Federal Reserve, will also have the power to
break up large firms, require increased reserves, or veto rules
created by another new regulator—the Bureau of Consumer Financial
Protection—with a two-thirds vote.

BUREAU OF CONSUMER FINANCIAL PROTECTION

The
Bureau of Consumer Financial Protection consolidates most federal
regulation of financial services offered to consumers and replaces
the Office of Thrift Supervision’s seat on the FDIC board. Almost
all credit providers, including mortgage lenders, providers of
payday loans, other nonbank financial companies, and banks and
credit unions with assets over $10 billion will be subject to new regulations.

CPAs
providing “customary and usual” accounting activities, including the
provision of “accounting, tax, advisory, or other services that are
subject to the regulatory authority of a [s]tate board of
accountancy” are carved out from the bureau’s authority. In
addition, other services “incidental” to such usual and customary
accounting activities, to the extent that they are not offered or
provided separate and apart from such customary and usual accounting
activities or to consumers who are not receiving such customary and
usual accounting activities, are also carved out. Refund
anticipation loan providers are not exempt.

SOX 404(b) EXEMPTION

The
act amends the Sarbanes-Oxley Act (SOX) to make permanent the
exemption from its section 404(b) requirement for nonaccelerated
filers (those with less than $75 million in market cap) that has
temporarily been in effect by order of the SEC. The act also
requires the SEC to complete a study within nine months of the act’s
enactment on how to reduce the burden of 404(b) compliance for
companies with market caps between $75 million and $250 million. The
study will consider whether any such methods of reducing the burden,
or a complete exemption, would encourage companies to list on exchanges.

PCAOB’S NEW POWERS

The
act closed an ambiguity in SOX. Under SOX, auditors of
broker-dealers were required to register with the board, but the
board did not find SOX gave it authority to regulate auditors of
privately-held broker-dealers. “The Dodd-Frank Act provides the
PCAOB with standard-setting, inspection and disciplinary authority
regarding broker-dealer audits,” said the PCAOB in a statement.

However,
the act allows the PCAOB, in its inspection rule, to differentiate
among broker-dealer classes and exempt introducing brokers such as
those who do not engage in clearing, carrying or custody of client
assets. The act reconciles registration with inspection so that any
auditors not covered by the inspection rule would also no longer be
required to register with the PCAOB.

The
act also allows the PCAOB, under certain circumstances, to share
information with foreign auditor oversight authorities, which should
help the board gain access to foreign regulators’ inspection
information as well.

The
PCAOB said more information about its plans to implement this
authority and guidance for auditors of brokers and dealers will be forthcoming.

ACCOUNTING STANDARDS

The
act gives the Financial Stability Oversight Council the duty to
monitor domestic and international financial regulatory proposals
and developments, including insurance and accounting issues, and to
advise Congress and make recommendations in such areas that will
enhance the integrity, efficiency, competitiveness and stability of
the U.S. financial markets.

In a
compromise reached in response to concerns raised by the AICPA and
others over more onerous language proposed in earlier stages of the
legislation, the final act allows the council to “submit comments”
to the SEC and any standard-setting body with respect to an existing
or proposed accounting principle, standard or procedure.

The
act also provides a permanent funding mechanism for GASB by
authorizing the SEC to require a national securities association to
levy an “accounting support fee,” the proceeds from which would be
remitted to the Financial Accounting Foundation.

REGISTERED INVESTMENT ADVISERS

Currently,
the Investment Advisers Act of 1940 requires investment advisers
with over $30 million in assets under management to register with
the SEC.

Advisers
with assets under management between $25 million and $30 million may
elect to register with the SEC. Under the Dodd-Frank act, this
threshold will be raised to $100 million, thus shifting more than
4,000 of approximately 11,500 SEC-registered investment advisers to
state securities regulatory oversight, said AICPA Senior Manager
Teighlor March.

However,
the act provides certain exceptions to this requirement. For
example, if an adviser would have to register in 15 or more states
as a result, the act provides an option to register instead with the SEC.

AIDING AND ABETTING SECURITIES FRAUD

Because
it lowers the legal standard from “knowing” to “knowing or
reckless,” the act may make it easier for the SEC to prosecute
aiders and abettors of those who commit securities fraud under the
Securities Act of 1933, the Securities Exchange Act of 1934, and the
Investment Advisers Act of 1940.

The
AICPA and state CPA societies successfully lobbied to exclude more
onerous amendments to the bill that would have opened the door for
trial attorneys to file private rights of action.

A
study is required within one year of enactment regarding private
rights of action for aiding and abetting claims to be performed by
the Government Accountability Office. The outcome of this study
could potentially broaden the ability of private plaintiffs to bring
aiding and abetting claims in civil courts, which would be a setback
to the CPA profession.

ADVISERS TO PRIVATE FUNDS

Significantly,
the act eliminates the private adviser exemption under the
Investment Advisers Act of 1940, which will consequently result in
more advisers’ having to register with the SEC. Advisers to venture
capital funds remain exempt from registration, as well as advisers
to private funds if such an adviser acts solely as an adviser to
private funds and has U.S. assets under management below $150
million. It also amends the Investment Advisers Act to specifically
exclude “family offices” from registration as an investment adviser.

EXECUTIVE COMPENSATION, CORPORATE GOVERNANCE

The
act requires a nonbinding shareholder vote on executive pay.
Compensation based on financial statements that are restated must be
returned for the three years preceding the restatement in an amount
equal to the excess of what would have been paid under the restated
results. Listing exchanges will enforce the compensation policies.

“Management
focus on accounting accuracy may be enhanced, but in the end
compensation committees may still set compensation at the board’s
discretion,” said AICPA Technical Manager Sharon Strother.
“Companies may need to review existing compensation contracts.”

The
act also requires directors on compensation committees to be
independent of the company and its management, and requires new
disclosures regarding compensation.

The
act requires the SEC, within 180 days after enactment, to issue
rules requiring companies to disclose in the proxy statement why
they have separated, or combined, the positions of chairman and CEO.

OFFICE OF THRIFT SUPERVISION

The
Office of Thrift Supervision (OTS), which is currently the regulator
for savings-and-loan (S&L) financial institutions, will be
rolled into the Office of the Comptroller of the Currency (OCC),
which also regulates federally chartered banks.

Although
the act makes clear that the OTS will no longer exist after its
responsibilities are transferred to the OCC, it also allows existing
thrift chartered institutions to continue to operate under OCC
regulation and the OCC can grant new charters for federal savings
banks.

Matthew
G. Lamoreaux (mlamoreaux@aicpa.org)
is a JofA
senior editor. The author wishes to thank the following AICPA
staff who made substantial contributions to the preparation and
review of this article: Diana Deem, Matthew Iandoli, Peter
Kravitz, Cynthia Lund, Teighlor March, Mark Peterson and Sharon Strother.

To
comment on this article or to suggest an idea for another article,
contact Matthew G. Lamoreaux, senior editor, at mlamoreaux@aicpa.org or 919-402-4435.

For
additional information on the Dodd-Frank Act, see the following
online resources:

§
1011 creates a stand-alone Bureau of Consumer Financial
Protection to regulate the offering/provision of consumer
financial products or services under federal consumer
financial laws. The bureau has independent rule-writing
authority and the authority to examine and enforce
regulations for banks/credit unions with assets greater than
$10 billion and other nonbank financial
companies.

CPAs
providing “customary and usual” accounting activities,
including the provision of “accounting, tax, advisory, or
other services that are subject to the regulatory authority
of a [s]tate board of accountancy” are carved out from the
bureau’s authority. Also carves out other services
“incidental” to such usual and customary accounting
activities, to the extent that they are not offered or
provided separate and apart from customary and usual
accounting activities or to consumers who are not receiving
customary and usual accounting
activities.

Threshold
for investment advisers to register with
SEC

§
410 raises the assets under management (AUM) threshold to
$100 million (currently $25 million by statute; $30 million
by rule). If, as a result, an adviser has to register in 15
or more states, he or she can register with the
SEC.

Change
will shift more than 4,000 (of 11,500) registered investment
advisers to the states. Impacts CPAs who are investment
adviser representatives (or IAs), who potentially are
shifted to state regulation and subject to state
examinations.

Aiding
and abetting securities fraud

§§
929M-O allow SEC to prosecute those who aid and abet (in
addition to controlling persons), and reduce the legal
standard from “knowing” to “knowing or
reckless.”

Impacts
CPAs in firms who are working with public companies. Impact
on CPAs is increased risk to the extent that the legal
standard is changed.

PCAOB
broker-dealer (BD) auditor registration

§
982 requires auditors of all BDs to register with PCAOB.
Gives the PCAOB the authority to require a program of
inspection for auditors of BDs who are registered with the
PCAOB. Allows the PCAOB to differentiate among BD classes
and exempt introducing brokers (for example, nonclearing,
carrying, custodial) when establishing such inspection
programs. Conforms registration with inspection such that
any auditors not covered by the inspection rule would also
no longer be required to register.

The
AICPA supports PCAOB audit/inspection for firms who audit
BDs that clear, carry and custody (or are issuers). Impacts
CPA firms who are registered with the PCAOB and audit
nonpublic broker dealers, because they may no longer have to
be inspected by the PCAOB.

Executive
compensation

§§
951-957 give shareholders a say on pay with a right to a
nonbinding vote on executive pay and golden parachutes. SEC
gets legal authority to grant shareholders proxy access to
nominate directors. Standards for listing on an exchange
require that compensation committees include only
independent directors.

Auditors
of public firms may need to assess management’s compliance
with new procedures on executive compensation,
accountability and governance.

CPAs
in public practice should be familiar with these
protections. The law provides an exception for “any
whistleblower who gains the information through the
performance of an audit of financial statements required
under the securities laws and for whom such submission would
be contrary to the requirements of section 10A of the
Securities Exchange Act of 1934.”

Registration
of advisers to private funds

§§
401, 403, 407, 408 & 409 add definition of “private
adviser” to the Investment Advisers Act of 1940 (IAA) and
eliminate the private adviser registration exemption. The
act exempts from registration advisers to venture
capitalists (a term to be defined by final rule within a
year). It also exempts advisers to private funds if such
adviser acts solely as an adviser to private funds and has
assets under management in the U.S. of less than $150
million. Also amends IAA to exclude “family offices” (a term
to be defined by SEC rules) from registration as an
investment adviser.

More
advisers will register with the SEC. Will mostly impact
auditors of investment advisers and/or investment companies.
Impacts CPAs and firms whose lines of business include work
for advisers and private funds. The AICPA supported repeal
of the private adviser exemption.